Medicare provides insurance coverage for health care services. However, Medicare typically covers only a portion of the total costs for such health care service. The uncovered costs that remain, also known as the “gap”, must be paid by the patient. Accordingly, insurance companies have made Medicare Supplement insurance (Medigap) available to help fill the “gaps” in Medicare coverage. Medicare Supplement insurance can be found that pays for some or all of the Medicare gaps.
The National Association of Insurance Commissioners (NAIC) defined a set of different Medigap standardized plans, wherein each plan is separately defined as a specified combination of gaps it covers. One of these plans, Plan F, covers nearly all gaps in Medicare coverage. As depicted in FIG. 1, another plan, High Deductible Plan F, also covers nearly all gaps in Medicare coverage but only after the policy owner has paid an amount equal to the deductible in each calendar year. In 2008, the policy owner would have to pay for the first $1,900 in health care service costs incurred. Thereafter, the High Deductible Plan F would pay nearly all of the remaining Medicare gaps. While this type of supplemental insurance provides less coverage, in view of the deductible, the premium for the High Deductible Plan F is significantly less expensive than Plan F. However, with a High Deductible Plan F, the amount of the deductible increases each year and the amounts paid by the policy owner toward the deductible may fluctuate greatly from one year to the next. Therefore, the person's out-of-pocket expenses each year can be unpredictable. Accordingly, prospective policy owners have had to pick between the “lesser of evils” in determining the scope of their supplemental coverage.
Retirees tend to live on fixed incomes. Their main sources of income commonly include Social Security income, pension income, investment income and, in some cases employment income. To protect their fixed incomes, a Medigap policy is purchased to provide more predictable out-of-pocket expenses when heath care is necessary. As defined by the NAIC, the benefit level provided by a given Medigap plan remains fixed over time. However, a retiree's income and health needs may change: generally, income opportunities and health diminish as they age. In addition, purchase of a different Medigap plan at a later date may require the retiree to undergo underwriting to qualify and have a (higher) premium based on their (higher) age at that time. As a result, retirees have largely purchased the most comprehensive coverage available, regardless of their income or health.
Products available in the Medicare Supplement marketplace are standardized. Accordingly, price often becomes the sole driver when retirees make their purchasing decisions between one company's offering versus another's. On such a basis, lesser regard is given to a company's service levels, or how a purchaser's needs may change over time. While regulation allows for innovative benefits, few have been made available. Standardized plans allow for ease of comparison for shoppers and minimize confusion regarding the benefits provided. Any new benefit structures to improve product suitability would need to maintain the simplicity that standardization offers.